Nearly every small business will, at some point, experience the impact of an economic slowdown. Whether it’s a full-blown recession or a cyclical period of economic decline, business owners are often left struggling to figure out a way to survive. Yet many small businesses are overlooking one of the best strategies available for weathering the turmoil of tough economic times – partnering with a private equity firm.
Running or managing a small business isn’t easy. It often leaves owners very little time to deal with the challenges of an economic downturn. Many businesses find it difficult to adjust to shifting market conditions. Others have liquidity problems and trouble maintaining a healthy cash flow. But businesses backed by private equity are often surprised to see that even during a recession, they can still thrive.
Here are three key ways small business private equity can help you survive a recession:
1. Specialized Knowledge and Operating Capabilities
Small business private equity firms offer their clients a true competitive advantage. The expertise, contacts, and industry connections can help owners maximize the value of their business. Partnering with a small business private equity firm can help owners analyze their finances and streamline processes. Working directly with your management team, they can help develop constructive solutions and foster an environment of growth and success. For example, they may offer extensive experience in launching online distribution or securing government contracts. Or they may leverage relationships with financial institutions on behalf of their clients.
Small business private equity firms create operational and strategic value. They offer a deep bench of talent and knowledge necessary to help businesses improve performance and operating capabilities.
By improving operations, businesses can go from barely staying afloat to becoming leaner and more cost-effective. This ensures that they are better positioned for when the market improves and allows them to look beyond the present circumstances towards achieving future business goals. That means, with the right partner, business owners can effectively capitalize on opportunities to grow, even in a weakening economic climate.
2. Expertise in Financial Restructuring
During times when the economic outlook is mixed or uncertain, some companies will find that their business model is outdated, and the only way to save their business and build resilience is to restructure their company. There are many different reasons for financial restructuring. A business may need to reduce costs or consolidate debt. Some may be looking for a way to incorporate new technology or improve their competitive advantage. Others might be considering a merger or acquisition. Financial restructuring can help companies avoid declaring bankruptcy and unnecessary legal fees.
Private equity firms can offer significant expertise in financial restructuring and reshaping strategies to preserve or restore the profitability and value of a company. They can help balance your budget, manage your cash flow, and rebuild your credit. Indeed, some owners and entrepreneurs find that partnering with a small business private equity firm has helped them not just survive, but even prosper during a tough economy. Some common forms of assistance that PE-backed businesses benefit from include realigning financial liabilities, seeking relief from maintenance covenants, modifying contract terms, and raising new equity to pay down business debt. They also help businesses evaluate and navigate potentially tricky compliance and regulatory issues involved.
3. Greater Access to Capital
For companies experiencing temporary distress, a cash infusion may be the key to staying afloat. Private equity firms can provide them with the financial resources they need to make it through a downturn and even fuel growth. This can be an effective way to avoid severe liquidity problems when a business is no longer able to operate within the constraints of their existing budgets.
Private equity financing has many advantages over traditional debt-equity financing, such as a bank loan. One of the biggest benefits of raising capital through equity is that private equity firms do not charge interest. This allows companies to reinvest money back into their business that would have otherwise gone to pay interest. Moreover, while a bank’s only concern is getting their loan payments, an investor’s main concern is making sure your business succeeds.
If you are a small business owner facing a recession, like the one caused by the COVID-19 pandemic, this may be a good time to consider a partnership with a private equity firm. Through their expertise and financial acumen, and with greater access to capital, they can help you not only hold on to but advance your market position. They can bolster your bottom-line and help you accelerate growth.
As a PE-backed company, you’ll have a significant advantage over your competitors and future-proof your organization for the next inevitable economic downturn.